Every business deals with workers' compensation issues ranging from high premiums to invalid claims. Understanding what steps you need to take can help you learn how to lower workers' compensation costs.
However, tracking the evolution of state-based workers' compensation legislation and regulatory guidance is staff intensive. For multi-state employers, the task is often beyond the capacity and capabilities of a small Human Resources (HR) department.
That’s one of several reasons that companies are outsourcing human resources administrative burdens like workers comp to HR consulting firms and third-party administrators such as professional employer organizations (PEOs).
Workers' compensation insurance benefits pay the medical expenses, lost wages, and rehabilitation costs for workers who suffer job-related injuries or sickness. Workers' comp also pays death benefits to survivors of workers who suffer fatalities on the job. Injuries and sickness reportable to the Occupational Safety and Health Administration (OSHA) are recoverable under workers’ comp.
There are four types of workers' compensation policies available depending on where your employees reside and work.
Who Sets Workers' Compensation rules?
Individual states set workers' compensation benefits limit. State Workers' Compensation Boards protect workers' rights and promote businesses' compliance with the state's workers' comp laws.
In most states, each business faces a mandate to buy workers' compensation insurance products sold by insurance carriers in their state. In other states, businesses must participate in a state-sponsored workers' compensation fund. Texas is the only state that does not mandate employers to provide Workers Compensation coverage.
Workers' compensation coverage does not cover short-term and long-term disability. Such disability coverage also addresses injuries that result in partial and total disability. Labor unions often provide supplemental disability benefits to their members injured on the job.
4 Types of Workers' Compensation Policies
In practice, businesses have different types of workers' compensation policies from which to choose:
- Master Policy with a PEO - This form of workers' compensation insurance covers the PEO's direct employees as well as the employees of its clients. The Master Policy follows the workers' compensation rules for each state of coverage.
- Multiple Coordinated Policy (MCP) with a PEO - This form of workers' compensation covers the employees of multiple clients of the PEO that is separate from the PEO's coverage for its direct employees. In addition, each client company has its own policy for its direct employees written under the client's name and company’s Federal Employer Identification Number (FEIN). The policy then instructs how the terms are coordinated between the client and the PEO.
- Multiple PEO Policies - This policy form provides workers' compensation and employer liability to leased employees of the PEO.
- Client Secures Separate Coverage - This policy form provides workers' compensation under a separate policy purchased by the PEO's client for the client's direct employees and leased employees.
7 Ways PEOs Fix High Workers Comp Costs
Outsourcing your HR responsibilities to your PEO partner provides your business the opportunity to cut payroll costs. The PEO provides an advantage in the following ways.
Lower Experience Modifier Rates
Insurance companies use an Experience Modifier Rate (EMR) to determine the premium for workers' compensation coverage through their insured products. The insurance carrier bases your EMR on the industry you serve, your workers' compensation claims experience, and other factors.
When you join the PEO's plan, your rate is based on the PEO's EMR which may be lower than the EMR for your business's individual policy. That is one way PEOs save you money on premiums.
Lower Premiums with Economies of Scale
Like group health insurance coverage, joining your PEO’s workers' plan provides world-class coverage at a price you would not be able to get on your own.
Aside from lowering your EMR, joining a PEO means your employees are added to the PEO’s client pool.
This spreads risk spreads among all the PEO's client companies, not just your business. Insurance carriers offer better rates to larger risk pools (known as "economies of scale”). Economies of scale often means accessing the same cost-savings available to large employers like Fortune 500s.
Optimize Class Codes
Employee classification codes are another component of your insurance premium. Each employee has a classification code. Choosing the wrong classification code can result in a higher premium than it should. Your PEO has the experience and knowledge to make the right classification choices for your employees.
Skip Upfront Deposits
When you buy a separate workers' compensation policy for your business, the insurance company will frequently require an upfront deposit of 25% to 100% of the yearly premium. Small businesses may find the cost prohibitive.
When you become part of the PEO's plan, there is no upfront deposit required. You will pay-as-you-go for the PEO's coverage.
Claims Administration and Fraud Prevention
PEOs offer your business quality claims administration. That includes fraud prevention.
Your PEO reviews every claim to make sure the claims are valid. Meanwhile, your over-burdened HR staff can concentrate on what they do best: Grow your business.
Worksite Safety Training
Your HR outsourcing partner will review your business's safety program with an eye to changes you should make to revise the program. If your business does not currently have a worksite safety training program, your PEO will create one for your employees to keep them safe and well.
The PEO's experts function as risk management consultants that help you assess workplace safety. HR experts will recommend changes that put in place the risk management policies that reduce workplace injuries and the total number of injury claims.
Return-to-Work Program
A return-to-work program helps you reduce your Workers' Compensation burden because you can get your employees off the injured list and back to work.
A return-to-work program allows your employees to return to light duty while they continue their recovery. The return-to-work program gets your employees back to work safely and timely. If your injured employee returns to work, they will no longer receive Workers' Compensation benefits which reduces your company costs.
How to Find the Right PEO Workers' Comp Program
There is no one magic solution to reducing and keeping your company's workers' comp costs low. There are many ways that you can reduce your costs and a PEO manages them all.
With HR experts on staff, your PEO complements your existing HR team and takes on the complex and time-consuming burden of managing workers' comp. Your company ends up with a positive ROI by reducing your costs and increasing the productivity of your in-house team, giving them time to focus on your core business needs. Partnering with a PEO reduces your headaches and saves you money.
